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Consultation on implementation of Sharman Panel recommendations issued by FRC

PN 032
30 Jan 2013

The Financial Reporting Council issues for consultation, guidance for directors, and related standards for auditors, to implement the recommendations of the Sharman Panel of Inquiry into Going Concern and Liquidity Risks.
The Panel was commissioned in March 2011 to identify lessons from the financial crisis and recessionary environment for companies and auditors, addressing going concern and liquidity risks; and to recommend measures, if any, which are necessary to improve the existing reporting regime and related guidance in relation to these matters.
The inquiry highlighted the importance of the identification, analysis and management of risk.  It raised questions about the quality of information provided on companies’ financial health and their ability to withstand economic and financial stresses in the short, medium and longer term.
The inquiry recommended, and the FRC has concluded, that to improve the robustness and reporting of the going concern assessment, the boards of companies complying with the FRC’s Corporate Governance Code should:
  • consider the threats to the company’s business model and capital adequacy, over a period longer than twelve months, looking through the economic cycle and the company’s own business cycle;
  • develop a high level of confidence that solvency and liquidity risks can be managed effectively during the period of at least twelve months from approval of the financial statements;
  • always disclose the significant risks to the company’s solvency and liquidity and how they are being managed, as part of its discussion of principal risks in the business review; and
  • confirm that it has undertaken a robust going concern assessment.
In addition, auditors should consider the board’s report on the robustness of its assessment and the resulting disclosures in the annual report and confirm in their report that they have nothing to add or to draw attention to.
Commenting on the proposals, FRC Chairman Baroness Hogg said:
“The work of the Sharman panel has been instrumental in identifying lessons from the financial crisis and providing guidance for directors and standards for auditors going forward. I would personally like to thank Lord Sharman for his work over the past two years and for tackling a very difficult and important issue.”
Lord Sharman commented:
“I am pleased that the FRC is launching this consultation to implement our recommendations.  The Panel believes these will be radical for many companies but that, if implemented effectively, they will: support better risk decision‐taking; ensure that investors, creditors and other stakeholders are well‐protected and informed about the going concern risks; and sustain an environment in which directors recognise, acknowledge and respond to economic and financial distress sooner rather than later.”
The Bank of England provided information about its role and responsibilities that assisted in the development of a supplement to the guidance in relation to the special circumstances of banks. Banks are encouraged to adopt the guidance as soon as possible.
The Consultation Paper is available here and responses to the consultation questions and other comments are requested by 28 April 2013.
Notes to editors:
  1. The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

  2. The key changes to the going concern assessment and reporting processes reflected in the proposed Guidance, Supplement and changes to the auditing standards, as compared with the extant Guidance issued in 2009 , are as follows and are more fully discussed in the Consultation Paper:
  1. Primary purpose of assessment
2009 guidance – assessment of whether the company is a going concern was made on a periodic basis when preparing annual and half‐yearly financial statements – primary purpose was to assess whether going concern basis of accounting appropriate. 

2013 guidance – assessment is integrated with on-going business planning and risk management and management of the business – primary purpose is to reinforce responsible behaviour in the management of going concern risks – the periodic accounting conclusions, on the going concern basis of accounting and material uncertainties are a by-product.
  1. Assessment period
2009 guidance – All available information about the future was considered – primary focus was on budgets and cash flow forecasts and facilities, which were reviewed for a minimum period of one year but for longer periods if appropriate; medium term plans were also considered by larger companies in general terms.

2013 guidance – All available information about the future is considered.  The board has regard to the foreseeable future ie what the board knows or should reasonably be expected to know about the future.  This is not a fixed period.  The board’s active consideration should be sufficient to obtain a high level of confidence that the solvency and liquidity risks can be managed effectively over a period of at least twelve months from approval of the financial statements.  There should be additional, qualitative consideration of the evolution of solvency risks over longer periods, through the economic cycle and the company’s own business cycles through stress testing and other consideration.  The degree to which periods beyond one year are actively considered should be broadly consistent with what is necessary to effectively manage the business given the nature of its activities, industry conditions and position in the economic cycle. 
  1. Assessment process
2009 guidance – Focus was primarily on liquidity risks – the assessment involved applying sensitivity analysis to test headroom in facilities and undertaking stress tests of pessimistic but plausible combinations of estimates or assumptions when headroom was tight.

2013 guidance – Focus is on both solvency and liquidity risks.  Prudent stress tests are applied to test resilience to both solvency and liquidity shocks in severe but plausible scenarios.  Application of reverse stress tests is considered.  Consideration is given to the impact of significant solvency and liquidity risks on shareholders, creditors and other stakeholders having regard to the duties of the directors under the Companies Act in pursuing the success of the company.
  1. Reporting
2009 guidance – In relation to identifying whether material uncertainties about the company’s ability to continue as a going concern that should be disclosed, there were varying views as to the appropriate threshold for disclosure of material uncertainties.  The threshold condition of the company, both by reference to which material uncertainties were identified and by reference to which the board’s conclusion as to whether the company is a going concern (required to be disclosed under the Code and Listing Rules), was generally linked to the accounting threshold for concluding whether the going concern basis of accounting was appropriate.  This is a very high threshold (broadly, when there is no realistic alternative to liquidation or cessation of trading). 

2013 guidance – Guidance is given that the threshold for judging the company to be a going concern for the purpose of making the statement required under the Code and Listing Rules is when, ‘for the foreseeable future, there is a high level of confidence that it will have the necessary liquid resources to meet its liabilities as they fall due and will be able to sustain its business model, strategy and operations and remain solvent, including in the face of reasonably predictable internally or externally-generated shocks’.  Guidance is also given to assist in establishing a common understanding of the threshold for disclosure of material uncertainties.

Neither the threshold for material uncertainty disclosures nor the threshold for judging a company to be a going concern is now linked to the very high threshold criteria for determining whether the going concern basis of accounting should be applied.  The annual report discusses the work of the audit committee in relation to the going concern assessment, gives the board’s conclusion as to the robustness of its assessment, always discusses the significant solvency and liquidity risks that the company takes and faces and how they are managed (not only when those risks are heightened) and the auditor’s report explicitly addresses whether the auditor has anything to add or to emphasise in relation to these disclosures.
  1. The Sharman Panel of Inquiry was established at the invitation of the Financial Reporting Council to consider Going Concern and Liquidity Risks: Lessons for companies and auditors and published its final report and recommendations on 13 June 2012. Further background information about the Sharman Panel and copies of its reports and recommendations can be found at:

  2. All Press enquiries should be directed to: Sophie Broom, Communications Executive, on telephone: 020 7492 2395 or email: .

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